HI6026 Audit, Assurance & Compliance: Public Interest & Audit Quality

This report analyzes the responsibilities of auditors, focusing on public interest and audit quality. It begins with a stakeholder analysis of Origin Energy, highlighting the impact of material misstatements on investors, business partners, and suppliers. The report emphasizes auditor independence and the role of whistleblowing in maintaining ethical standards. Lessons from the Enron collapse and the behavior of Arthur Anderson are examined, stressing the importance of efficient auditing standards and avoiding accounting falsification. The report concludes by outlining steps auditors should take to ensure audit quality and minimize threats. Desklib offers a variety of study resources, including past papers and solved assignments, to aid students in their academic pursuits.

Running head: AUDIT, ASSURANCE AND COMPLIANCE
Audit, Assurance and Compliance
Name of the Student
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Executive Summary
The report states that Origin Energy has various stakeholders like investors, business
partners and others who can be affected by the inappropriate identification of material
misstatements in the financial statements. As per this report, whistle-blowers help in
reporting the unethical actions within the organizations. After that, the auditors can learn
many lessons from the collapse of Enron like the restriction on the manipulation of the
financial statements, use of the proper auditing standards and others. The report states that
the auditors are needed to comply with all auditing standards and regulations for the
minimization of audit threats.

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Table of Contents
1. Introduction............................................................................................................................3
2. Origin Energy’s Stakeholder Analysis.....................................................................................3
3. Independence of Auditors and Whistleblowing in Auditing..................................................5
3.1 Auditor Independence.....................................................................................................5
3.2 Whistleblowing................................................................................................................5
3.3 Public Interest Requirements...........................................................................................6
4. Lessons from the Collapse of Enron and the Behaviour of Arthur Anderson’s.....................6
4.1 Auditing Lessons...............................................................................................................6
4.2 Lesson from Behaviour of Arthur Anderson....................................................................9
5. Quality of Audit and Needed Steps to be taken by the Auditors........................................10
6. Conclusion............................................................................................................................12
7. References............................................................................................................................14
8. Appendices...........................................................................................................................17

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1. Introduction
The auditing procedures demand the involvement of the auditors for the inspection
and analysis of the financial reports of the audit clines in order to ensure that they are free
from material misstatements (Louwers et al. 2015). The audit report provides the assurance
whether there is any material misstatements in the financial statements and the key
organizational stakeholders consider audit reports as an essential tool to judge the
truthfulness and fairness of the financial reporting of the companies. In this situation,
inferior conduct of audit procedures fails to provide sufficient audit assurance and the
material misstatements in the financial statements remain undetected (Knechel and Salterio
2016). This particular situation affect the key stakeholders of the companies majorly as the
presence of material misstatements contribute to wrong investment decisions by the key
stakeholders. For this reason, the auditors are needed to take lessons from the large
corporate collapses with the aim to avoid the same mistakes again. This report aim at
performing key stakeholder analysis on Origin Energy, an ASX listed company, for analysing
the effects of undetected material misstatements on them. This report also considers
analysing the aspects like auditor independence, whistleblowing, auditors’ lessons from
Enron scandal and others.
2. Origin Energy’s Stakeholder Analysis
Origin Energy has certain stakeholders who are closely connected to the business
operations of the company; and the presence of material misstatements in the financial
statements would majorly affect them from different dimensions. These are discussed
below:

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Investors: As per Appendix 1, the investment community of Origin Energy includes retail
shareholders, institutional investors, credit reporting agencies, institutional investors and
various analysts like Environmental Social and Governance advisers who bank on the
material information of the company for making knowledgeable decision about the current
and future performance of the company (originenergy.com.au 2018). It implies that this
group of stakeholder use the financial reports of the company for extracting material
financial information for ascertaining the financial performance of Origin Energy. In this
situation, if the material misstatements in the financial statements remain undetected due
to improper identification, these stakeholder would not be able in ascertaining the current
and future financial performance of the company and it will affect their investment decision
making process (Brasel et al. 2016).
Business Partners: Origin Energy has a number of joint venture as well as investment
partners in the domestic as well as international market. As per Appendix 1, this group of
stakeholder also contains the businesses that involves in providing good and services for the
projects and operations of the company (originenergy.com.au 2018). For this reason, the
responsibility of the company is to provide these stakeholders with the material information
through ASX. In addition, the company maintains regular communication throughout daily
operations with additional engagement. In this situation, improper identification of material
misstatements in the financial statements can create a hurdle for these business partners to
determine the financial performance of the company with the aim to engage with them in
business processes (Doxey 2014).
Suppliers: As per Appendix 1, Origin Energy has a number of suppliers who provide the
company with certain direct as well as indirect services for the purpose of their business

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operations. The company always try to maintain a cordial relationship with their suppliers
by providing them with the required material financial information of their business
(originenergy.com.au 2018). Hence, improper identification of material misstatements in
the financial statements can create doubts in these stakeholders about the ability of the
company in satisfying the current as well as long-term business obligations. At the same
time, liability of the companies tend to increase in the presence of material misstatements
in the financial statements and it can create difficulty for this stakeholders to provide credit
terms to the company (Glover and Prawitt 2014).
3. Independence of Auditors and Whistleblowing in Auditing
3.1 Auditor Independence
The principles of auditor independence states that the auditors are needed to be
independent from their audit clients; thus, the requirements of independence applying to
the auditors are legally enforceable. Auditor independence is mainly considered as the
external auditor independence (Tepalagul and Lin 2015). Moreover, in the audit profession,
whistleblowing is considered as a crucial attributor and it is connected with the aspects like
governance and ethics in the profession. The principles of auditor independence put the
obligation on the auditors that they are needed to disclose the information about the
presence of material misstatements and ethical violations in the audit reports after
completion of the audit procedures. This aspect makes auditors’ commitment to
independence can be regarded as an important consideration in auditing (Gul, Wu and Yang
2013).

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3.2 Whistleblowing
The obligation of the auditors towards independence has the ability to create both
direct and indirect impact on the whistleblowing process of the external auditors. Strong
commitment towards auditor independence can lead to the prevention of unethical audit
practices in the companies. It can be observed that the process of whistleblowing can be
regarded as a set of guidelines that create scope for the employees in reporting unethical
activities in the companies (Rachagan and Kuppusamy 2013). Whistle-blowers can be
individuals within the organizations and they uncover information related to unethical
activities in the companies. Faithfulness and assurance towards the business organizations
can be enhanced with the whistleblowing process.
3.3 Public Interest Requirements
In case of the ethical situations, the auditors can obtain the required standards and
regulations from APES 110 Code of Ethics that the Accenting Professional and Ethical
Standard Board (APESB) has issued. APES 110 Section 210.11.1 puts the obligation on the
auditors to request to the client to communicate with the previous auditors (apesb.org.au
2018). In case the client refuses to accept the request, the requirement is the drop the
nomination for the selection of the auditor. On the contrary, the auditor is required to
request for the required information to the previous auditor if the audit client accepts the
request. It is necessary process as it is related to the nomination of the auditors. This
regulation provide the necessary safeguard to the whistle-blowers; and the employees and
other staffs can get freedom of speech due to this. According to APES 110 Section 100.1, the
organizational whistle-blowers have the right to report about certain unethical aspects in
the companies with the necessary evidences; they are misuse of authority, material
mismanagement and others (apesb.org.au 2018).

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4. Lessons from the Collapse of Enron and the Behaviour of Arthur Anderson’s
4.1 Auditing Lessons
The collapse of Enron provides the auditors with certain auditing lessons for avoiding
these kinds of collapse in further; and they are discussed below:
Efficient Standard of Auditing: The auditors are needed to take into account the issues in
accounting standards from the case of Enron. It can be observed from the facts of the
collapse of Enron that the auditor of the company did not comply with the accounting
standards of United States (US) at the time of the accounting conduct of off-balance sheet
items; and it majorly contributed towards the collapse of the company. It has been seen
over the times that the presence of major lobbying has been a major hindrance towards the
attempts of Financial Accounting Standard Board for improving the existing accounting
standards. In order to avoid this whole situation of chaos, it is absolutely requited to
implement more effective accounting standards so that the needed financial regulations and
principles can be brought in the place of unnecessary regulations (da Silveira 2013).
The Enron collapse also indicates towards the absence of effective governance
mechanism within the firms. The main aim of the implementation of effective governance
policies is to ensure the acting of senior management as the shareholders’ agents. However,
the senior executives of the firms retain the control over the corporate governance
mechanism as they hold supreme stock options. It is needed to readjust this whole system
in the shareholders’ favour. Hence, the need is to employ truthful non-executive directors
who would ensure the fair distribution of remuneration along with the development of
audit and other committees for ensuring the implementation of robust internal control. In a

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nutshell, companies are needed to have effective corporate governance mechanism for
effective auditing (Kandemir 2013).
Avoiding the Accounting Books Falsification: Correct accounting treatments of the financial
accounts of the firms has overall contribution in the development of active capital market.
To some extent, the collapse of Enron caused the temporary collapse of the audit profession
as Enron’s auditors were majorly accountable for the falsification of various financial
statements of the company for their personal benefits. At the same time, the presence of
conflict of interest and illegal personal incentives contributed towards the collapse of Enron
(Azibi and Rajhi 2013). In general, it is the right of the shareholders of the firms to appoint
the auditors and thus, the auditors are accountable to the shareholders for the reporting of
necessary information. In realism, senior management of the firms appoint and use the
auditors for their personal interests. For this reason, the auditors can be found in delivering
various non-audit and consulting services to the audit clients. There are instances where the
appointment of external auditors can be seen as the internal auditors. In this manner, the
auditors become the puppets of the senior management for obtaining the audit contract
with lucrative audit fees. These factors affect the overall audit quality (Albeksh 2016).
The above-mentioned situations can be avoided by providing all the audit
responsibilities to the government agencies instead of the private accounting firms.
However, this would enhance the inherent risk of auditing. In addition, the government
agencies cannot provide the full assurance that they will become successful to manage the
mistakes and conflict of interest occurred in the previous cases. One most crucial aspect is
to ensure that the senior managements of the companies do not have the right and
responsibility to appoint the auditors. It would be better if the government agencies have

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the responsibility for appointing the auditors with appropriate fees structure based on the
auditing needs of the clients (Aydin 2014).
At the same time, the desperate need for strict legislative regulations cannot be
ignored in the audit profession in order to start penalizing power. The peer review along
with the professional bodies have been helping the auditors to escape the legislative
regulation as they have been controlling the power. This aspect indicates towards the
necessity of banning the audit firms to provide their clients with the non-audit as well as
consulting services. In addition, with the aim to diminish over commitment of the auditors
to the audit firms, it is necessary to implement mandatory rotation of audit firms on the
basis of every four years. The example of most possible peer review is the reviewing of the
audit judgements of previous auditors. For this, the Australian Securities and Investment
Commission (ASIC) needs to ban the process to select internal auditor from the external
audit companies (Hosseini and Mahesh 2016).
4.2 Lesson from Behaviour of Arthur Anderson
Arthur Anderson, the audit partner of Enron, was majorly responsible for the
collapse of the company. Arthur Anderson was responsible for ensuring the correctness of
financial statements and conduct the bookkeeping process of Enron; and the investors of
the companies regarded the audited financial statements of Enron as essential tools for
investment decision-making (Dibra 2016). It needs to be stated that Arthur Anderson was
the business partner of Enron and some of the executives of the company got job from
Enron. Due to these reasons, Arthur Anderson ignored clarifying the necessary aspects
before engaging as an audit partner of Enron. In March, 2002, it was the acquisition on
Arthur Anderson that they demolished certain crucial financial documents of Enron. Thus,

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the presence of all these aspects indicate that Arthur Anderson was extremely unethical
while auditing the financial statements of Enron and it is due to the fact that they receive
huge amount of fees from Enron for the falsification of the financial statements (Hosseini
and Mahesh 2016).
5. Quality of Audit and Needed Steps to be taken by the Auditors
There is not any globally accepted definition of audit quality, but it is needed for the
auditors to maintain the quality of audit when the auditors obtain the required degree of
professional scepticism as needed by the auditing standards (Gunny and Zhang 2013). In
addition, the others audit requirements are to obtain necessary understanding about
client’s business, coordination and others. Greg Medctaft has indicated towards the
possibility of occurring the collapse like Enron in Australia if the bug four audit firms that are
PwC, Deloitte, KPMG and E&Y do not take the necessary steps for enhancing the standard of
audit. As per his warning, ineffective audit of the financial statements of big companies can
lead to financial crisis in Australia (abc.net.au 2018).
Greg Medctaft states that Australia might witness many corporate collapse like
Enron of the above-mentioned issues are not resolved (abc.net.au 2018). It is the utmost
requirement for the auditors to carry out the audit procedures carefully by acquiring
enough audit evidence that the financial statements of the companies are free from
material misstatements. APES 110, Section 2 puts the obligation on the auditors for
providing the necessary assurance on providing true and fair image of all the material
aspects. Greg Medctaft indicates towards the fact that one major reason for the collapse of
Enron was the failure of auditing at the time of financial crisis. This aspect shows the crucial
responsibility of the auditors that they are needed to be careful as well as accountable while

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conducting the audit operations with the aim to provide the true and fair image on material
misstatements to the key stakeholders of the company (Chui and Pike 2013).
The news article shows information about the ASIC’s collection of audit samples for
the eighteen months until December 2016 conducted by the top four audit firms of Australia
that are PwC, KPMG, E&Y and Deloitte. It is important to mention the fact that these
companies failed to provide sufficient assurance in 23 percent cases on the fact that there is
not any material misstatements in the financial statements. This large percentage of failure
by these four companies indicates towards the lack of professional scepticism by them along
with their lack of ability to deal with the complex auditing circumstances; and it is negative
for the overall audit profession. In this context, it needs to be mentioned that the collapse
of Enron due to accounting and auditing frauds also affected the auditors in the presence of
their involvements (Covitz, Liang and Suarez 2013).
According to Greg Medctaft, ASIC piloted 7000 surveillance and more than thousand
investigation on the audit of the companies (abc.net.au 2018). After this, ASIC did ban 600
firms and provided imprisonment order to more than 80 company executives and returned
$1.3 billion to the investors within six years. All these situations indicate towards the
urgency to maintain the audit quality to reduce the threat of auditor independence to
acceptable level. According to the statement of Greg Medctaft, APES 110, Section 290.155
states that process of auditor rotation cannot provide the safeguard in case only few
auditors possess the needed expertise and skill for conducting the audit procedures. In case
the independent regulator exempt the auditors from rotation, it becomes possible for the
auditors to stay as a key audit partner for their audit clients for more than seven years.